Capital budgeting decisions

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Aftaab (Querist)

20 January 2013 Thomson Ltd., a food manufacturer, is considering purchasing a new machine for £300,000. The annual running costs are expected to be £20,000 plus straight line depreciation charge. The machine is expected to last for 4 years, after which the machine will be scrapped for an estimated amount of 20% of the original cost. The annual revenue is forecasted to be £80,000 and the cost of capital is 10 %. My doubts, i am unable to understand how to calculate PBP, NPV, ARR and IRR My main problem is i am not getting idea how to use working capita in all the 4. I know all the problems but i forget about working capital issues. please help me by suggesting me on all four methods how to use working capital.

Amol S Joglekar

Amol S Joglekar (Expert)

20 January 2013 When revenue and running cost is given, do not consider any working capital as such. Assume the running cost to take care of the corking capital.

Aftaab

Aftaab (Querist)

20 January 2013 hi amol can you please cleary write what to do? please iam in very urgency. like shall i ad to cost of machine or shall i have to calculate each year with PV factor, please help

thanks

Hari Beldona

Hari Beldona (Expert)

20 January 2013 Working capital is for operating the business such as manufacturing, trading or rendering service. normally said bussiness units will be financed by banks for working capital against hypothication of stock in trade and receivables.
In working capital two types are there. one is normal working capital another is core working capital- the unit has to maintain certain level of raw materials and finished goods always by nature of business. Core working capital is financed by banks as term loan in such a case you may consider for computing PBP ARR NPV IRR PI

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